Commercial Floor Traders Identify Value
by Donald L. Jones
STOCKS & COMMODITIES contributor Donald Jones presents the use of Liquidity Data Bank (otherwise
known as Market Profile) to analyze the futures market by studying commercial activity.
A commodity's value is the attribute that all trading methods seek to identify. The fundamentalist is
clearest about it: Isolate all the economic factors, weight them and combine them to grab the prize: value.
Technical analysts use price (and sometimes volume and open interest) to develop trading models —
implicity equating some type of smoothed price change to value change. But the link between price and
value in most models is nebulous because value is so difficult to pinpoint.
Then, too, value is often a moving target. In trading range markets (referred to here as bracketing), value
is the peak region of "price over time." Value wins the trading popularity contest, the price region with
the most trading over the bracketed time period. Identifying this "fair" price (that is, region) can be
accomplished in a bracketing market with the Overlay Demand Curve (discussed previously in STOCKS &
COMMODITIES articles), and in a book on the same subject.
Commercial members, who use the futures markets mostly for business purposes rather than speculation,
represent a wide range of concerns and include grain merchants, livestock hedgers, banks, oil companies,
savings and loans as well as others. A commercial's charge is to perform his daily business at value —
that is, within the day's value area, which is where 70% of the trading occurs that day. Because of the
nature of their business, commercial traders know more about where value may be found and changes
therein than do others in the market. I will discuss two forms of value here: first today's value, as in value
area (referred to as "v" in Figures 1 through 6), and also the longer-term, multiday value established in
the Overlay Demand Curve (referred to as "V" in Figures 1 through 6). Information on commercial
traders' volume at price is released by the clearing association of the Chicago Board of Trade and the Chicago Mercantile Exchange.